Recently, the Victorian Supreme Court determined that a clause in a labour hire contract providing for payment of an "introduction fee" by an employer to a labour hire company constituted an unreasonable restraint of trade.
The decision of the Court highlights the wide-ranging operation of the restraint principles and illustrates that seemingly standard contractual clauses may not be enforceable on the basis that they effectively operate in restraint of trade.
The relevant facts of the case are set out below.
Earth Force Personnel Pty Ltd v EA Negri Pty Ltd [2010] VSC 426
Earth Force Personnel Pty Ltd (Earth Force), a labour hire company, entered into a contract with EA Negri Pty Ltd (Negri) for the supply of personnel to Negri.
A clause in the contract required Negri to pay a fee to Earth Force if Earth Force introduced a worker from its labour pool to Negri and Negri subsequently hired that worker.
Pursuant to the contract, Earth Force placed a casual worker with Negri for a period of six weeks. Almost three months after the worker finished the placement, Negri directly hired the worker on a permanent basis.
Earth Force issued an invoice to Negri for the introduction fee in respect of the worker. Negri refused to pay the introduction fee.
Earth Force commenced proceedings in the Magistrates' Court. Negri successfully defended the proceedings and Earth Force appealed the decision.
Decision of the Supreme Court
Justice Hargrave dismissed the appeal on the basis that the clause in the contract requiring payment of the fee amounted to an unenforceable restraint of trade.
The Court considered whether the clause operated in restraint of trade, stating that the substance of the clause was important and not its legal form. A clause would operate in restraint if it had the effect of deterring a promisee from engaging in trade or operated indirectly by way of an incentive or pressure to act in a particular way or refrain from acting in a particular way.
The Court found that the introduction fee was sufficiently high to deter Negri from directly employing a worker introduced to it by Earth Force.
Generally, clauses that operate in restraint of trade will be unenforceable unless the party seeking the restraint can prove the clause is reasonable. Having determined the clause operated in restraint, the clause was then reviewed to determine whether the restraint was reasonable.
The clause did not contain a time limitation on its scope. It was therefore conceivable that the hiring by Negri of an employee in 2018 could give rise to an introduction fee if that worker had been placed by Earth Force with Negri in (say) 2010.
The clause also contained no limitation upon the capacity in which the worker had to be hired. An introduction fee would be payable if a worker placed with Negri subsequently upgraded his or her skills and was employed by Negri directly in a new role involving those upgraded skills.
The Court concluded that Earth Force was unable to prove the operation of the clause was reasonable and therefore the clause was unenforceable.
Comments
Disputes regarding restraint of trade clauses more typically relate to provisions in a standard employment contract between the employer and employee. This case provides a timely reminder that restraint of trade clauses need not be express or direct or otherwise obvious and can arise in many situations.
The case also highlights the importance of drafting like clauses. In the judgement, the Court accepted that introduction fees are commonly charged by labour hire companies and are not necessarily against public policy. Simply put, the clause in this case was too broad. Had the clause contained some parameters or limitations on its scope, the appeal may have been successful.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.